Oil falls, but gas goes farther past $4

Tuesday, June 10, 2008

NEW YORK -- Oil prices dropped Monday on a stronger dollar and a call from Saudi Arabia for a meeting to talk about prices it called unjustifiably high, but gas prices kept marching higher, leaving the $4 mark in the rearview mirror.

The dollar improved against the euro after Treasury Secretary Henry Paulson said he would not rule out intervention to stabilize the U.S. currency. That provided some relief for oil, which is priced in dollars, after a record run-up Friday.

Saudi Arabia called for a meeting of oil-producing countries. A Saudi minister said the kingdom would work with OPEC to "guarantee the availability of oil supplies now and in the future." He also said the current price of oil is unjustified.

July futures for light, sweet crude fell $4.19 to settle at $134.35 a barrel in volatile trading on the New York Mercantile Exchange. On Friday, oil jumped nearly $11, a single-day record.

But gas just kept climbing. The national average price of a gallon of regular rose 1.8 cents to $4.023, according to AAA and the Oil Price Information Service. The average passed $4 Sunday, although many parts of the country have paid that for weeks.

And if oil stays near $139 a barrel, the high it set last week, gas prices will probably rise another dime in the coming days, said Tom Kloza, publisher and chief oil analyst at the Oil Price Information Service in Wall, N.J.

"The numbers do have some catching up to do," Kloza said. "There's a bit of a tape delay that happens with gasoline."

An AAA spokesman said prices could rise another 2 to 3 cents.

Drivers have shown signs of cutting back as gas prices go ever higher, but gas producers have little choice but to keep raising prices when the cost of their most important raw material, crude oil, goes up.

Already, high gas prices have caused a shift in the types of cars people buy. General Motors Corp. said last week it would close four plans that make pickup trucks and sport utility vehicles.

At today's prices, it costs nearly $91 to fill a Ford Explorer, up from $70 a year ago. A person who drives that Explorer 25 to 40 miles to and from work, not to mention chauffeuring children around, has to gas up twice a week at least.

A Morgan Stanley analyst's prediction that oil would hit $150 helped drive the rally Friday. At that rate, gas would cost about $4.40 a gallon, Kloza said.

Gas prices often peak around Memorial Day, then retreat over the course of the summer. But this is far from a normal year. Oil prices have been marching steadily higher since last fall, and sudden drops of $10 or more in oil have been followed by rapid rebounds and new heights.

Last week, oil prices rose nearly 14 percent in two days, trading as high as $139.12 a barrel, after slumping more than $13 from a previous record high.

The sharp jump last week began Thursday, after European Central Bank President Jean-Claude Trichet suggested the bank could increase interest rates in July to counter rising inflation. That sent the dollar falling against the euro.

In an interview on CNBC Monday, Paulson said he would not rule out the possibility of intervening to stabilize the dollar, though he declined to speculate about what the government might do. The dollar strengthened against the euro on Paulson's comments, sending oil lower.

Many investors buy commodities such as oil as a hedge against inflation when the greenback weakens. But on Monday, the effect reversed. The dollar gained ground, making oil less effective as an inflation hedge. Also, a stronger dollar makes oil more expensive to investors overseas.

One of the factors that underpinned Friday's rally was an Israeli cabinet minister's comment that his nation might attack Iran if it didn't halt its nuclear program.

But that prospect appeared to dissipate over the weekend as Israeli Prime Minister Ehud Olmert distanced himself from the comments and other officials noted that the minister had not been expressing official government policy.

But other factors support high oil prices. An explosion last week at a natural gas production facility in Australia has boosted demand for diesel by that country's mining sector, said Addison Armstrong, director of market research at Tradition Energy in Stamford, Conn.

In Nigeria, a major U.S. oil supplier, a strike later this week could take 450,000 barrels in daily oil supplies off the market, Armstrong said. Both events highlight how tight oil supplies are.

Some analysts see warning signs in Friday's bold oil price jump.

"It was a freakish oil market Friday as the market's worst fears -- some real and some imagined -- exploded into a rhapsody of wild buying," said Phil Flynn, an analyst at Alaron Trading Corp., in Chicago, in a research note.

The $10.75 move had some of the hallmarks of a "blow-off top," Armstrong said, or a rapid, explosive run-up in prices that's followed by steep declines. Still, it's far to early to tell for sure, he added.

"You never know you've been in a bubble until it's gone," Armstrong said.

In other Nymex trading Monday, July gasoline futures fell 15.4 cents to settle at $3.394 a gallon, and July heating oil futures fell 9.7 cents to settle at $3.877 a gallon. July natural gas futures fell 8.9 cents to settle at $12.604 per 1,000 cubic feet.

In London, July Brent crude fell $3.78 to settle at $133.91 a barrel on the ICE Futures exchange.

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